You must reduce your foreign taxes available for the credit by the amount of those taxes paid or accrued on income that is excluded from U.S. income under the foreign earned income exclusion or the foreign housing exclusion. See Pub.
54
for more information on the foreign earned income and housing exclusions.

If only part of your wages is excluded, you cannot take a credit for the foreign income taxes allocable to the excluded part. You find the amount allocable to your excluded wages by multiplying the foreign tax paid or accrued on foreign earned income received or accrued during the tax year by a
fraction.

The numerator of the fraction is your foreign earned income and housing amounts excluded under the foreign earned income and housing exclusions for the tax year minus otherwise deductible expenses definitely related and properly apportioned to that income. Deductible expenses do not include the foreign housing deduction.

The denominator is your total foreign earned income received or accrued during the tax year minus all deductible expenses allocable to that income (including the foreign housing deduction). If the foreign law taxes foreign earned income and some other income (for example, earned income from U.S. sources or a type of income not subject to U.S. tax), and the taxes on the other income cannot be segregated, the denominator of the fraction is the total amount of income subject to the foreign tax minus deductible expenses allocable to that income.

You are a U.S. citizen and a cash basis taxpayer, employed by Company X and living in Country A. Your records show the
following.

Foreign earned income received

$125,000

Unreimbursed business travel expenses

20,000

Income tax paid to Country A

30,000

Exclusion of foreign earned
income and housing allowance

103,900

Because you can exclude part of your wages, you cannot claim a credit for part of the foreign taxes. To find that part, do the
following.

First, find the amount of business expenses allocable to excluded wages and therefore not deductible. To do this, multiply the otherwise deductible expenses by a fraction. That fraction is the excluded wages over your foreign earned
income.

$20,000

×

$103,900 $125,000

=

$16,624

Next, find the numerator of the fraction by which you will multiply the foreign taxes paid. To do this, subtract business expenses allocable to excluded wages ($16,624) from excluded wages ($103,900). The result is
$87,276.

Then, find the denominator of the fraction by subtracting all your deductible expenses from all your foreign earned income ($125,000 − $20,000 =
$105,000).

If you have income from Puerto Rican sources that is not taxable, you must reduce your foreign taxes paid or accrued by the taxes allocable to the exempt income. For information on figuring the reduction, see Pub.
570.

If you are a bona fide resident of American Samoa and exclude income from sources in American Samoa, you cannot take a credit for the taxes you pay or accrue on the excluded income. For more information on this exclusion, see Pub.
570.

You cannot claim a foreign tax credit for foreign income taxes paid or accrued under the following circumstances. However, you can claim an itemized deduction for these taxes. See
Choosing To Take Credit or Deduction, earlier.

A waiver can be granted to a sanctioned country if the President of the United States determines that granting the waiver is in the national interest of the United States and will expand trade and investment opportunities for U.S. companies in the sanctioned country. The President must report to Congress his intentions to grant the waiver and his reasons for granting the waiver not less than 30 days before the date on which the waiver is granted.

In figuring the foreign tax credit limit, discussed later, income from a sanctioned country is a separate category of foreign income unless a Presidential waiver is granted. You must fill out a separate Form 1116 for this income and check box e at the top of the
form.

You lived and worked in Iran until August, when you were transferred to Italy. You paid taxes to each country on the income earned in that country. You cannot claim a foreign tax credit for the foreign taxes paid on the income earned in Iran. Because the income earned in Iran is a separate category of foreign income, you must fill out a separate Form 1116 for that income. You cannot take a credit for taxes paid on the income earned in Iran, but that income is taxable by the United
States.

A foreign tax credit may be claimed for foreign taxes paid or accrued with respect to section 901(j) income if such tax is paid or accrued to a country other than a sanctioned country. For example, if a U.S. citizen resident in a non-sanctioned country pays a residence-based income tax in that country on income derived from business activities in a sanctioned country, those foreign taxes would be eligible for a foreign tax credit. Any taxes imposed on that income by the sanctioned country would not be eligible for a foreign tax credit. If no taxes are paid or accrued to sanctioned countries, you generally would complete Form 1116 for this category only through line
17.

Table 1
lists the countries for which sanctions have ended or for which a Presidential
waiver has been granted. For any of these countries, you can claim a foreign tax
credit for the taxes paid or accrued to that country on the income for the
period that begins after the end of the sanction period or the date the
Presidential waiver was granted.

The sanctions against Country X ended on July 31. On August 19, you receive a distribution from a mutual fund of Country X income. The fund paid Country X income tax for you on the distribution. Because the distribution was made after the sanction ended, you may include the foreign tax paid on the distribution to figure your foreign tax
credit.

If a sanction period ends (or a Presidential waiver is granted) during your tax year and you are not able to determine the actual income and taxes for that period, you can allocate amounts to that period based on the number of days in the period that fall in your tax year. Multiply the income or taxes for the year by the following fraction to determine the amounts allocable to that period.

You are a calendar year filer and received $20,000 of income from Country X in 2018 on which you paid tax of $4,500. Sanctions against Country X ended on July 11, 2018. You are unable to determine how much of the income or tax is for the nonsanctioned period. Because your tax year starts on January 1, and the Country X sanction ended on July 11, 2018, 173 days of your tax year are in the nonsanctioned period. You would figure the income for the nonsanctioned period as
follows.

173 365

×

$20,000

=

$9,479

You would figure the tax for the nonsanctioned period as follows.

173 365

×

$4,500

=

$2,133

To figure your foreign tax credit, you would use $9,479 as the income from Country X and $2,133 as the
tax.

The rules for figuring the foreign tax credit after a country's sanction period ends are more fully explained in Revenue Ruling 92-62, Cumulative Bulletin 1992-2, page 193. This Cumulative Bulletin can be found in many libraries and IRS offices.

You cannot claim a foreign tax credit for withholding tax (defined
later) on dividends paid or accrued if either of the following applies to the
dividends.

The dividends are on stock you held for less than 16 days during the 31-day period that begins 15 days before the ex-dividend date (defined
later).

The dividends are for a period or periods totaling more than 366 days on preferred stock you held for less than 46 days during the 91-day period that begins 45 days before the ex-dividend date. If the dividend is not for more than 366 days, rule (1) applies to the preferred
stock.

When figuring how long you held the stock, count the day you sold it, but do not count the day you acquired it or any days on which you were protected from risk of loss.

Regardless of how long you held the stock, you cannot claim the credit to the extent you have an obligation under a short sale or otherwise to make payments related to the dividend for positions in substantially similar or related property.

You bought common stock from a foreign corporation on November 3. You sold the stock on November 19. You received a dividend on this stock because you owned it on the ex-dividend date of November 5. To claim the credit, you must have held the stock for at least 16 days within the 31-day period that began on October 21 (15 days before the ex-dividend date). Because you held the stock for 16 days, from November 4 until November 19, you are entitled to the
credit.

If you are a securities dealer who actively conducts business in a foreign country, you may be able to claim a foreign tax credit for qualified taxes paid on dividends regardless of how long you held the stock or whether you were obligated to make payments for positions in substantially similar or related property. See section 901(k)(4) of the Internal Revenue Code for more
information.

If you are a dealer in property who actively conducts business in a foreign country, you may be able to claim a foreign tax credit for qualified taxes withheld on income or gain from that property regardless of how long you held it or whether you have to make related payments on positions in substantially similar or related property. See section 901(I)(2) of the Internal Revenue Code for more
information.

You cannot take a credit for the disqualified portion of any foreign tax paid or accrued in connection with a covered asset acquisition. A covered asset acquisition includes certain acquisitions that result in a stepped-up basis for U.S. tax purposes but not for foreign tax purposes. For more information, see Internal Revenue Code section 901(m) and the temporary regulations under that section, including Treasury Decision 9800, in Internal Revenue Bulletin 2016-52 at
IRS.gov/IRB/2016-52_IRB#TD-9800.

You cannot claim a foreign tax credit for taxes paid or accrued to a foreign country in connection with the purchase or sale of oil or gas extracted in that country if you do not have an economic interest in the oil or gas, and the purchase price or sales price is different from the fair market value of the oil or gas at the time of purchase or
sale.

You must reduce any taxes paid or accrued to a foreign country or possession on mineral income from that country or possession if you were allowed a deduction for percentage depletion for any part of the mineral income. For details, see Regulations section
1.901-3.

If you participate in or cooperate with an international boycott during the tax year, your foreign taxes resulting from boycott activities will reduce the total taxes available for credit. See the instructions for line 12 in the Form 1116 instructions to figure this
reduction.

In most cases, this rule does not apply to employees with wages who are working and living in boycotting countries, or to retirees with pensions who are living in these countries.

A list of the countries that may require participation in or cooperation with an international boycott is published by the Department of the Treasury. As of January 2016, the following countries are
listed.

You may request a determination from the IRS as to whether a particular operation constitutes participation in or cooperation with an international boycott. The procedures for obtaining a determination from the IRS are outlined in Revenue Procedure 77-9 in Cumulative Bulletin 1977-1. Cumulative Bulletins are available in most IRS offices and you are welcome to read them there.

You must file a report with the IRS if you or any of the following persons have operations in or related to a boycotting country or with the government, a company, or a national of a boycotting
country.

A foreign corporation in which you own 10% or more of the voting power or value of all classes of stock but only if you own the stock of the foreign corporation directly or through foreign
entities.

You must reduce your foreign taxes by a portion of any foreign taxes imposed on combined foreign oil and gas income. The amount of the reduction is the amount by which your foreign oil and gas taxes exceed the amount of your combined foreign oil and gas income multiplied by a fraction equal to your pre-credit U.S. tax liability (Form 1040, line 11a and Schedule 2 (Form 1040), line 46) divided by your worldwide taxable income. You may be entitled to carry over to other years taxes reduced under this rule. See Internal Revenue Code section
907(f).

Combined foreign oil and gas income means the sum of foreign oil related income and foreign oil and gas extraction income. Foreign oil and gas taxes are the sum of foreign oil and gas extraction taxes and foreign oil related
taxes.

Taxes of U.S. Persons Controlling Foreign Corporations and
Partnerships(p10)

If you had control of a foreign corporation or a foreign partnership for the annual accounting period of that corporation or partnership that ended with or within your tax year, you may have to file an annual information return. If you do not file the required information return, you may have to reduce the foreign taxes that may be used for the foreign tax credit. See
Penalty for not filing Form 5471 or Form 8865, later.

If you are a U.S. citizen or resident who had control of a foreign corporation during the annual accounting period of that corporation, and you owned the stock on the last day of the foreign corporation's annual accounting period, you may have to file an annual information return on Form 5471. Under this rule, you generally had control of a foreign corporation if, at any time during your tax year, you owned stock
possessing:

More than 50% of the total combined voting power of all classes of stock entitled to vote,
or

More than 50% of the total value of shares of all classes of stock of the foreign corporation,
or

Under prior law, a U.S. person meets the definition of control only if the ownership criteria above were met for an uninterrupted period of at least 30 days during the annual accounting period of the foreign corporation. The 30-day rule was repealed for taxable years of controlled foreign corporations beginning after 2017, and taxable years of U.S. shareholders with or within which such taxable years of foreign corporations
end.

If you are a U.S. citizen or resident who had control of a foreign partnership at any time during the partnership's tax year, you may have to file an annual information return on Form 8865. Under this rule, you generally had control of the partnership if you owned more than 50% of the capital or profits interest, or an interest to which more than 50% of the deductions or losses were
allocated.

You also may have to file Form 8865 if, at any time during the tax year of the partnership, you owned a 10% or greater interest in the partnership while the partnership was controlled by U.S. persons owning at least a 10% interest. See the Instructions for Form 8865 for more
information.

In most cases, there is a penalty of $10,000 for each annual accounting period for which you fail to furnish information. Additional penalties apply if the failure continues for more than 90 days after the day the IRS mails you notice of the failure to furnish the
information.

If you fail to file either Form 5471 or Form 8865 when due, you also may be required to reduce by 10% all foreign taxes that may be used for the foreign tax credit. Additional reductions apply if the failure continues for 90 days or more after the date the IRS mails you notice of the failure to furnish the information. The total reductions shall not exceed the greater of $10,000 or the income of the foreign corporation or foreign partnership for the accounting period for which the failure occurs. This foreign tax credit penalty also is reduced by the amount of the dollar penalty imposed.

Reduce taxes paid or accrued by any taxes paid or accrued with respect to a foreign tax credit splitting event. For foreign taxes paid or accrued in tax years beginning after 2010, if there is a foreign tax credit splitting event, you may not take the foreign tax into account before the tax year in which you take the income into account. There is a foreign tax credit splitting event with respect to a foreign income tax if (in connection with a splitter arrangement listed below) the related income is (or will be) taken into account by a covered person. A covered person is either of the
following.

An entity in which you hold, directly or indirectly, at least a 10% ownership interest (determined by vote or
value).

Any person who is related to you. For a list of related persons, see
Nondeductible Loss in Pub.
544, chapter 2.

A reverse hybrid is a splitter arrangement if you pay or accrue foreign income taxes with respect to income of a reverse hybrid. A reverse hybrid is an entity that is a corporation for U.S. federal income tax purposes but is a fiscally transparent entity (under the principles of Regulations section 1.894-1(d)(3)) or a branch under the laws of a foreign country imposing tax on the income of the
entity.

A foreign group relief or other loss-sharing regime is a loss-sharing splitter arrangement to the extent that a shared loss of a U.S. combined income group could have been used to offset income of that group (usable shared loss) but is used instead to offset income of another U.S. combined income
group.

A U.S. equity hybrid instrument is a splitter arrangement if payments or accruals on or with respect to this instrument meet all of the following
conditions.

They give rise to foreign income taxes paid or accrued by the owner of this
instrument.

They give rise to income tax deductions for the issuer under the laws of a foreign jurisdiction in which the issuer is subject to
tax.

They do not give rise to income for U.S. federal income tax
purposes.

A U.S. equity hybrid instrument is an instrument that is treated as equity for U.S. federal income tax purposes but is treated as indebtedness for foreign tax purposes, or with respect to which the issuer is otherwise entitled to a deduction for foreign tax purposes for amounts paid or accrued with respect to the
instrument.

A U.S. debt hybrid instrument is a splitter arrangement if the issuer of the U.S. debt hybrid instrument pays or accrues foreign income taxes with respect to income in an amount equal to the interest (including original issue discount) paid or accrued on the instrument that is deductible for U.S. federal income tax purposes but that does not give rise to a deduction under the laws of a foreign jurisdiction in which the issuer is subject to
tax.

A U.S. debt hybrid instrument is an instrument that is treated as equity for foreign tax purposes but as indebtedness for U.S. federal income tax
purposes.

An allocation of foreign income tax that a partnership pays or accrues with respect to an interbranch payment as described in Regulations section 1.704-1(b)(4)(viii)(d)(3) (revised as of April 1, 2011) (the interbranch payment tax) is a splitter arrangement to the extent the interbranch payment tax is not allocated to the partners in the same proportion as the distributive shares of income in the creditable foreign tax expenditures (CFTE) category to which the interbranch payment tax is or would be assigned under Regulations section 1.704-1(b)(4)(viii)(d) without regard to Regulations section
1.704-1(b)(4)(viii)(d)(3).